Economy shook off worst effects of Sept. 11

The Washington Post

Published Tuesday, September 10, 2002

So bleak, so chaotic, so unprecedented were the circumstances in the days after the Sept. 11 terrorist attacks, that many businesses and financial analysts feared a national, and perhaps even global economic disaster.

The U.S. economy, which was already weakening in the summer of 2001, ground to a virtual halt in mid-September. Airlines stopped flying. Many businesses ceased functioning. Theaters went dark. Advertisements were pulled. At U.S. borders and ports, trucks and containers were stuck for days awaiting inspection, causing some factories to close for lack of parts. The New York Stock Exchange, after a four-day shutdown, reopened with the Dow Jones industrial average plunging 684 points, followed by further declines that added up to the worst week for the index in more than 60 years.

But the economy shook off the worst effects of the attacks with amazing speed -- powerful evidence for the view, espoused most prominently by President Bush, that knocking down steel and concrete towers could not destroy the vitality of the system they symbolized.

The recession of 2001 proved to be the nation's mildest in 30 years as American consumers went on a spending spree, thanks in no small part to a dramatic drop in interest rates engineered by the Federal Reserve as well as tax cuts pushed earlier in the year by the Bush administration. While the economy has begun slowing anew in mid-2002, that is attributable to factors unrelated to Sept. 11, principally the continued bursting of the late 1990's stock-market bubble and the fallout from the scandals afflicting corporate America.

But as subdued as the blow was to the economy's short-term performance, the repercussions of the attacks are taking a toll on America's long-term economic prospects, the magnitude of which is still unclear.

The costs to businesses of security delays and other logistical problems are exerting a drain on the economy that, while not crippling, will persist for years. Moreover, the government's once-sunny budget outlook -- which had held out the promise of enormous surpluses to bankroll Social Security -- has worsened appreciably, in part because of the tens of billions of dollars required for the military buildup and homeland security, but also because of a significant weakening in fiscal discipline amid a changed political atmosphere in Washington.

So today, some of the analysts who foresaw dire consequences stemming from the attacks are admitting that their worst fears were badly misplaced. But the economic situation is still more precarious than before Sept. 11, they say, not least because some of the past year's prosperity was borrowed against the future.

"We're all prone to hyperbole in the midst of a shock -- especially one as disturbing as last fall's. I am guilty of that myself," Stephen Roach, chief economist at Morgan Stanley, wrote in a letter to clients last week. "Resilience," he acknowledged, has been "an unmistakable feature of the post-9/11 world."

But the swift recovery, and the spending binge that fueled it, "has come at a cost, and we haven't paid the bill for that cost," Roach maintained, citing household debt that now tops 75 percent of the nation's gross domestic product -- a record, and 10 percentage points above the debt load of a decade ago. "The cost is more debt, and massive tax cuts that have transformed a budget surplus into a deficit."

Reasons certainly abounded last September to doubt that the economy would bounce back as strongly as it did, especially considering how shaky it already looked in the weeks prior to the attacks.